When things aren’t going smoothly during a construction project, it can be very frustrating. However, there are only limited circumstances where you will have the right to terminate a building contract. A right to terminate arises either under the common law of contract or under terms of the contract itself.
What is termination?
Termination of a contract is the process of bringing an end to the contract before the parties have fully performed their obligations under the contract. When a contract has been terminated, all remaining performance obligations created by the contract cease to exist, but the contract may still give rise to continuing rights.
Grounds to terminate a contract
Leaving aside frustration and illegality of the contract, there are generally three grounds that give rise to a right of termination of a contract, namely:
- Termination by Agreement
You can terminate a contract when you and the other party agree to. This can be either an express agreement or an implied agreement. Although you can expressly terminate an agreement verbally, it is recommended to do so in writing. Any implied agreement to terminate must be clear through the parties’ conduct. This conduct must indicate that neither party requires the other to perform their obligations under the contract.
When negotiating an agreement to terminate a building contract, great care should be given to all terms that might be necessary to bring an orderly and final end to the contract. Matters that should be considered include:
- Any final payments;
- Completion of any works;
- Care of works and possession of site pending handover of works and site;
- Timing and conduct of handover of works and site;
- Any ongoing warranties or responsibilities;
- Releases and indemnities.
- Termination for Breach of Contract
When considering terminating a contract because you believe the other party is in breach of a term or terms of the contract, you must first identify which term has been breached. You then need to determine whether the term is an ‘essential’ or ‘non-essential’ term.
Essential terms are the fundamental terms of the contract or terms that go to the heart of the contract. Generally, any breach of an essential term of a contract will give rise to an entitlement to terminate the contract.
A breach of a non-essential term of a contract will generally only give rise to a right of termination if the breach is sufficiently serious in terms of its consequences for the innocent party to the contract.
- Termination for Repudiation of Contract
A party will be in repudiation of a contract where they demonstrate an intention not to be bound by the contract or that they are unwilling or unable to perform their obligations under the contract. This demonstration can be express or implied.
Termination may only occur if the repudiation relates to either a fundamental or sufficiently serious contractual obligation.
Where a party repudiates a contract, the other party may accept the repudiation and elect to terminate the contract.
Contractual Right of Termination
Building contracts often expressly provide for rights of termination upon the occurrence of particular events or breaches.
Such rights of termination for breach will often need to be preceded by a notice specifying:
- The breach of contract giving rise to the right of termination;
- A certain time by which the breach is required to be remedied; and
- That if the breach is not remedied within that time, the party giving the notice may terminate the contract.
Although not mentioned in this blog, it is important to remember that there are other remedies a party might seek to enforce a building contract either in conjunction with, or instead of, termination, including damages and equitable remedies such as specific performance and injunction.
Whether you’re a builder or building owner, Preston Law has experts on hand to advise you in respect of disputes concerning any building contracts, whether domestic, commercial or infrastructure.